Q Search this course X Back to Assignment Attempts Keep the Highest / 3 12. Savings decisions Felix is a post doctoral fellow who teaches electromagnetism at a university where he earns an annual salary of $200,000. He intends to take the next year off to focus on writing a new undergraduate physics textbook, so he will not earn any income next year. He is currently deciding how much of this year's salary he should save for next year. Assume that there are no tax implications associated with the decision, and ignore what happens after next year. Therefore, next year Felix will consume whatever he saves this year plus interest, and he is not concerned with the future beyond next year. The following graph shows Felix's preferences for consumption this year and next year. Suppose initially Felix cannot earn interest on the money he saves. Use the green line (triangle symbol) to plot Felix's budget constraint ( BC1 ) on the following graph. Then use the black point (plus symbol) to show his optimum consumption bundle. Note: Dashed drop lines will automatically extend to both axes. A+ ? Apr 28 7:48 0 MOD backspace esc D 9 5 2 3 4Note: Dashed drop lines will automatically extend to both axes. E 240 A 220 200 BC, (0% Interest) EI 180 -+ 160 Initial Optimum (0% Interest) 140 O CONSUMPTION NEXT YEAR (Thousands of dollars) 120 100 BC, (20% Interest) N 80 60 New Optimum (20% Interest) 20 ? 0 20 40 60 80 100 120 140 160 180 200 220 240 CONSUMPTION THIS YEAR (Thousands of dollars) OCENGAGE | MINDTAP Q Search this Homework (Ch 21) Now suppose Felix can earn 20% real interest on any money he saves. Use the blue line (circle symbol) to plot his new budget constraint ( BC2 ) on the previous graph. Then use the grey point (star symbol) to plot his optimum consumption bundle at this interest rate. (Hint: To plot BC2, think about how much money Felix would have next year if he saved his entire income this year.) Using the previous graph, complete the following table by indicating how much Felix should save of his current income when he cannot earn any interest on his savings and when he can earn 20% interest on his savings. Interest Rate Amount Fellx Saves (Percent) ( Dollars) 0 20 Which of the following statements is a good description of the results of this exercise, as well as its implications for broader consumer behavior? In this case, Felix saves more money when interest rates are high. However, consumers with different preferences might save less money when interest rates are high. All consumers, Including Felix, save less money when interest rates are high, because they don't need to save as much money to have MO Apr 28 Oomework (Ch 21) using the previous graph, complete the following more by indicating now much Felix should save of his current income when he cannot eam any interest on his savings and when he can earn 20% interest on his savings. Interest Rate Amount Fellx Saves (Percent) (Dollars) 0 20 Which of the following statements is a good description of the results of this exercise, as well as its implications for broader consumer behavior? O In this case, Felix saves more money when interest rates are high. However, consumers with different preferences might save less money when interest rates are high. All consumers, including Felix, save less money when interest rates are high, because they don't need to save as much money to have the same future income. All consumers, including Felix, save more money when interest rates are high, because they get a higher return on that investment. In this case, Felix saves less money when interest rates are high. However, consumers with different preferences might save more money when interest rates are high. Grade It Now Save & Continue Continue without saving O M hp